ENT 301 GWU Brainlab IPO Decision Case Study Essay

Description

Please submit a writeup that supports your decision about the issue faced by the protagonist in any one of the cases.

Describe the core opportunity, highlight the value proposition/opportunity and their accomplishments. You will need to directly address the questions faced by the protagonist (as posed in the introduction and concluding section of each case). The recommended format for an answer is to spend up to one page laying out the descriptive of the case and the core opportunity/value proposition/functional challenges. The first paragraph/page helps articulate that you “get the high-level picture.” Starting with the second paragraphj/page, you can address the questions raised in the case abstract itself, you can detail your analyses for the problems raised in detail, and also provide potential solutions that you would recommend.BrainLAB (B)
Abstract
Stefan Vilsmeier had decided that being acquired by Medtronic simply wasn’t
something that he wanted to do. Turning down the offer from Medtronic, however,
meant that competition – both on the legal front and in the marketplace – was about to
get nasty. SNT had already attempted to hire his best sales people in Europe and they
were offering prices for systems that were ridiculously low wherever BrainLAB was a
contender. How should BrainLAB respond?
This case was developed with the assistance of the Centre for Scientific Enterprise.
John W. Mullins, Associate Professor of Management Practice, London Business
School, prepared this case as the basis for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation. Financial and
other data have been disguised.
Copyright © February 2004. Revised October 2005. London Business
School. All rights reserved. No part of this case study may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means,
electronic, mechanical, photocopying, recording or otherwise without
written permission of London Business School.
London Business
School reference
CS-05-056
CS 94-007
hospital with the result of their dumping
our system”) and in Europe, where they
were offering IGS systems at prices far
below the normal pricing.
Vilsmeier Says No
“If you put pressure on him,” said Joseph
Doyle, “you can count on it that he won’t
do it. It’s a personal trait.”
Robert Grüter, BrainLAB’s sales director,
faced the brunt of the challenge. “We
were visiting a hospital in Rome, where
we’d been working on a contract for an
IGS system.
The hospital had been
quoted a very low price on a system from
Medtronic, and they had detailed
information about matters internal to
BrainLAB, including the fact that we were
out of stock on a key part. We suspected
that Medtronic had inside information,
probably from one of the persons they had
hired away from us. All told we lost a
couple of deals in Europe at half a million
dollars each. We simply had to respond.”
From his perspective, going through the
acquisition discussions had helped Stefan
Vilsmeier figure out what he really wanted
in life. “You really only need one or two
million to have all you could want,” he
remarked. “What’s the difference between
ten and one hundred million? What are
you going to do with it? I found the
expensive toys – the Learjet, the boat, the
extravagant estate on the lake – hideous.
It was not the life I would enjoy. I’m a
pretty simple guy. I realised that BrainLAB
can be the platform for anything I ever
want to do. And besides, who would keep
us on our toes if we didn’t have Medtronic
to compete with?
We’d already left
Radionics by the side of the road. One of
the best outcomes of our discussions with
Medtronic was that, by talking with us, they
didn’t get Radionics, which Tyco acquired.
We would have had a difficult problem if
Medtronic had gotten both SNT’s software
expertise and Radionics’ installed base.”
BrainLAB’s Options
While BrainLAB’s sales had continued to
grow nicely, to an expected €25 million in
its year ending September 1999, margins
were another story (see Exhibit 1). Gross
profit margins were slipping under
Medtronic’s competitive pressure and
BrainLAB expected to incur an operating
loss of some €3 million for the year. The
company’s cash position was down
sharply.
“I also realised that a lot of entrepreneurs
surround themselves with copies in their
own image, sometimes cheap copies with
slightly defective genetics. Our solution at
BrainLAB has always been to hire people
better than ourselves.
We trust our
instincts and we hire people we’d like to
spend some time with. We’ve turned away
many super-qualified people because they
just didn’t fit. And the fact that we don’t
simply write software – we cure cancer – is
a powerful attraction for the kind of people
we want on our team.”
“We had eight sales people in Europe, and
they had one who was making dumping
offers wherever we went,” recalled Grüter.
“It forced our prices down and hurt our
margins.
Essentially, we had three
options. One was to vigorously defend our
European turf, where we were the market
leader. The other was to attack Medtronic
on their turf – the US – where they held
the dominant share. But we had only a
limited sales presence in the US at the
time, as most of our US sales had come
through distributors, and our US sales
subsidiary was still small and just seven
months old.” The third option was to exit
the IGS market and focus on radiosurgery.
Medtronic Turns Up the Heat
It quickly became apparent that Medtronic
was going to compete aggressively and on
all fronts – in the courtroom, in North
America (“where they offered a halfmillion-dollar grant to a leading California
BrainLAB (B)
2
As Vilsmeier viewed the situation, “We
know we don’t have the distribution clout
on our own to compete long term, and
there’s really no US-based partner to
dance with in IGS, so the decision we
need to make is either to build it – through
a direct sales force – or to get out of the
US market.”
The problem was that
investing in its own direct sales force could
be ruinously expensive. “It would take
every last cent the company has,” worried
Vilsmeier, “and would force us to show
massive losses for at least the next two or
three years, beginning a cycle from which
we may never recover.”
Vilsmeier and Grüter knew they had to
respond. But how?
BrainLAB (B)
3
Exhibit 1: Projected Financial Performance for Year Ending September 1999
Pro Forma Income Statement (Euros 000)*
Sales
Cost of sales
24,853
(8,997)
Gross profit
15,856
Operating expenses
Selling and marketing
General and administrative
Research and development
(9,814)
(5,756)
(3,220)
Total operating expenses
(18,790)
Operating loss
(2,934)
Other income
598
Net loss before taxes
(2,336)
Deferred income taxes
Current income taxes
225
(30)
Minority interests
(40)
(2,181)
Net loss
*All figures converted to Euros at 1 Euro = 1.95583 DM
BrainLAB (B)
4
Exhibit 1 (continued): Projected Financial Performance for Year Ending September
1999*
Pro Forma Balance Sheet (Euros 000)*
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable (trade)
Other current assets
Inventories
Prepaid expenses
Deferred tax assets, short term
178
8,209
1,608
2,804
44
225
Total current assets
13,068
Property, plant, and equipment (net)
1,376
Intangible assets
193
Financial assets
Investments
Other loans
46
0
Total financial assets
46
TOTAL ASSETS
14,683
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable, trade
Advanced payments received
Liabilities due to banks
Other liabilities
Accrued taxes
Other current accruals
Other deferred income
Deferred income tax
6,642
478
4,858
943
18
3,799
13
27
Total current liabilities
16,778
TOTAL LIABILITIES
16,778
Minority interests
40
Shareholders’ equity
Capital subscribed
Retained earnings
51
(2,186)
Total shareholders’ equity
(2,135)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
14,683
*All figures converted to Euros at 1 Euro = 1.95583 DM
BrainLAB (B)
5
BrainLAB (C)
Abstract
Stefan Vilsmeier and his team had decided that hitting Medtronic hard in the US
market, while also defending their position in Europe, was the only way that BrainLAB
could continue to flourish and achieve its founder’s dreams. The somewhat risky
strategy worked, thanks in part to generous bankers who provided the cash that
BrainLAB needed. Several months later, with technology stocks riding high and the
IPO market red-hot, an initial public offering seemed a good way to raise some cash to
pay back the bank debt, raise capital for growth, and achieve liquidity for the
shareholders. But by 3 July 2001, as the offering on Germany’s Neuer Markt was
ready to be released, the IPO market had cooled and the Neuer Markt was dropping
through the floor. Though Morgan Stanley, BrainLAB’s lead underwriter, was still
considering whether to proceed with the offering, based on the enthusiastic reception
the company had received during its road show, its recommendation was not to
proceed at this time. Vilsmeier, too, wasn’t so sure that taking his company into a
declining stock market was the right thing to do. But he also wondered whether he
could walk away from yet another opportunity to realise value from the company he had
built. With the offering ready to be released the next day, he had very little time to
decide.
This case was developed with the assistance of the Centre for Scientific Enterprise.
John W. Mullins, Associate Professor of Management Practice, London Business
School, prepared this case as the basis for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation. Financial and
other data have been disguised.
Copyright © February 2004. Revised October 2005. London Business
School. All rights reserved. No part of this case study may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means,
electronic, mechanical, photocopying, recording or otherwise without
written permission of London Business School.
London Business
School reference
CS-05-057
CS 94-007
had a good command of English and good
communication skills. They gave the ten
engineers a week-long crash course on
the benefits of BrainLAB’s passive marker
technology over Medtronic’s active marker
approach, equipped them with laptops and
a PowerPoint presentation, and sent them
on a two-week blitzkrieg in which they
called on the hospitals that had been
found to be considering purchasing IGS
systems. Concurrently, they hired some
new US-based sales people with strong
medical equipment track records and set
them loose on follow-up calls. “Within six
months,” recalled Vilsmeier, “we were
competing with Medtronic for nearly every
US deal, and Medtronic’s pressure in
Europe came to a halt.” The best news,
though, was that BrainLAB ended up
winning US contracts for eight IGS
systems, a significant beachhead from
which to grow in the world’s largest
market!
BrainLAB Fights Back
Stefan Vilsmeier decided to fight
Medtronic on all three fronts. On the
patent
front,
“We
had
no
real
understanding of the central role of IP in
our strategy,” recalled Joseph Doyle. “A
direct result of the lawsuit was a complete
transformation of how we manage our IP.”
Though the legal dispute continued, the
taking of depositions was a lengthy
process, and the end of the patent
disputes seemed a mere glimmer at the
end of a long tunnel. The more immediate
battles were fought in the marketplace in
Europe and the United States.
In Europe, rather than focusing on price,
which appeared to be Medtronic’s
strategy, BrainLAB focused on its superior
passive marker technology and easier-touse software. Robert Grüter and his sales
team provided detailed and complete
information about the competitive activity
to their hospital customers, with most of
whom they had already established good
relationships. Though margins continued
to suffer somewhat, BrainLAB won most of
the contracts.
Financing the Battle
“We used all our spare cash to build North
American distribution,” said Doyle, “and we
convinced our banks to finance our
receivables and inventory with credit
lines.” The cash from the banks – nearly
€5 million by year-end 1999 and €28
million by September 2000 – enabled
BrainLAB to operate at a significant loss
through that period without running out of
cash (see Exhibit 1).
Sales doubled
between 1999 and 2000, to €48 million,
with
North
America
and
Europe
contributing 43 percent and 42 percent of
sales, respectively, and with Asia/Pacific
accounting for the remaining 15 percent.
IGS systems comprised 59 percent of
sales, with radiosurgery accounting for 39
percent and services 2 percent.
What really saved the day, though, was
the strategy BrainLAB devised for the US
market. “The only way to get them off our
backs in Europe,” recalled Stefan
Vilsmeier, “was to take them on their own
home market and let them see that we
were not about to concede North America,
despite their strength.” The first thing
BrainLAB did was to go to the hospital
blue book and cold-call the top 2,000
hospitals in the US, a task that took a
month to complete.
Three simple
questions were asked: Do you have a
neurosurgical unit? If so, do you have an
IGS system? If not, are you considering
one?
Raising Cash for Growth
For step two, since BrainLAB really had no
US sales force (its small US office having
been focused largely on distributor
relations), Vilsmeier and Grüter selected
ten of BrainLAB’s software engineers who
BrainLAB (C)
While short-term financing enabled
BrainLAB to get through the crisis,
Vilsmeier and Doyle knew that BrainLAB
would soon need additional cash to pay off
2
June 2001 with an offering of 4.4 million
newly issued shares to be priced between
€13.50 and €17 per share, plus a possible
secondary offering by the current
shareholders for an additional 663,225
shares to cover over-allotments.
its short-term debt and to finance future
growth. In November of 2000, Doyle was
named CFO and was given the task of
taking BrainLAB public.
The first thing Doyle did was to call a few
business school classmates who had
taken their companies public, saying,
“Give me your road show presentation.”
He hired a consultant, for a modest
retainer and an equity kicker if the offering
went forward, one who had done 20 Neuer
Markt deals, to guide BrainLAB through
the laborious and intricate process.
If all went well, BrainLAB would raise
between €60 and €75 million to reduce its
debt and fund research and development
and other working capital needs, and
Vilsmeier and the other shareholders
would receive between €9 and €11.2
million for a small portion of their shares.
If the over-allotment were taken up,
Vilsmeier himself would receive between
€5.6 and €7 million (and would still hold 41
percent of the company’s shares), and
other key employees would also be well
taken care of.
Doyle spent the next six months of his life
coordinating the IPO process. The plan
was to list in April 2001 but the market for
technology stocks crashed, so the offering
was delayed until early summer. By May,
Doyle was ready for a test of the road
show presentation to five carefully
selected investors.
To Go or Not to Go?
It was 3 July and a sunny summer day in
London. Vilsmeier, Doyle, their financial
consultant, and the Morgan Stanley
people were seated around a conference
table
in
Morgan
Stanley’s
office
overlooking the majestic London skyline.
Only a single question was on the table:
whether or not to proceed with the
offering.
One of them, Henderson Global Investors,
liked the company so much that it agreed
to invest €20 million in June at a price of
€13.29 per share for 10 percent of the
company on a post-investment basis.
Henderson also was granted the right to
buy 526,750 convertible bonds at €1 each,
which could be exchanged for shares of
the company’s stock for an additional
payment of €15.61 per share, exercisable
following the trading of BrainLAB shares
on the Neuer Markt.
Given Doyle’s
growing concern over the state of the
stock market, the Henderson investment
would cover a good portion of BrainLAB’s
accumulated short-term debt in the event
that the public offering did not proceed.
The consultant thought they should go
ahead. After all, everyone had worked
day and night for six months to reach this
point, and the road show had clearly
shown interest – genuine excitement was
more like it – in BrainLAB’s offering.
Vilsmeier
called
Henderson,
which
advised that the decision was Vilsmeier’s
to make, but that it felt the market
conditions were not good for an IPO.
Morgan Stanley, “for the first time ever in
their history after a road show”, they said,
recommended that the offering be further
postponed or cancelled. “With the Neuer
Markt dropping up to 5 percent each day
for more than two weeks now, the
aftermarket
certainly
doesn’t
look
promising.”
In June, Doyle and Vilsmeier set forth on
their road show, a non-stop tour of
investment bankers and prospective
investors to ‘build the book’ in anticipation
of the IPO, now scheduled for early July.
For three solid weeks the duo made as
many as eight presentations per day. The
reception was enthusiastic, despite the
falling stock market, and a preliminary
offering memorandum was issued on 21
BrainLAB (C)
3
Vilsmeier looked across the table at
Joseph Doyle, who had spent seven days
a week since December to bring the
company to this table. It had been a huge
commitment. Vilsmeier thought about his
company’s somewhat precarious balance
sheet and the significant operating losses
BrainLAB was incurring (see Exhibit 2).
He thought about the €60 million or more
his company would receive to pay off its
debt and fund its further growth, money
that was sorely needed to fund
opportunities in orthopaedics and other
surgical specialties. And he thought about
the cash he and the rest of his
management team would be able to walk
away with if he went ahead with the
offering.
After having turned down
Medtronic’s offer to harvest some of the
value he and others had created over the
past 12 years, could he walk away once
more?
BrainLAB (C)
4
Exhibit 1: Financial Performance for Years Ending September 1999 and September
2000
Income Statement (Euros 000)
Sales
Cost of sales
September 30, 2000
48,656
(15,810)
September 30, 1999
24,853
(8,997)
Gross profit
32,846
15,856
Operating expenses
Selling and marketing
General and administrative*
Research and development
(23,495)
(28,207)
(5,521)
(9,814)
(5,756)
(3,220)
Total operating expenses
(57,223)
(18,790)
Operating loss
(24,377)
(2,934)
(501)
598
Net loss before taxes
(24,878)
(2,336)
Deferred income taxes
Current income taxes
324
(34)
225
(30)
Minority interests
57
(40)
(24,531)
(2,181)
Other income (expenses)
Net loss
*G&A expenses for Y/E 2000 includes €18,131 in non-cash compensation expense required
under US GAAP, reflecting the transfer of shares of stock from Stefan Vilsmeier and Robert
Grüter to other employees. Corresponding amounts appear on the balance sheet as
additional paid-in capital and payments for capital increase.
BrainLAB (C)
5
Exhibit 1 (continued): Balance Sheet (Euros 000)
September 30, 2000
September 30, 1999
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable (trade)
Other current assets
Inventories
Prepaid expenses
Deferred tax assets, short term
2,877
18,229
2,368
11,497
303
549
178
8,209
1,608
2,804
44
225
Total current assets
35,823
13,068
Property, plant, and equipment (net)
6,061
1,376
Intangible assets
8,008
193
Financial assets
Investments
Other loans
48
496
46
0
Total financial assets
544
46
TOTAL ASSETS
50,436
14,683
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable, trade
Advanced payments received
Liabilities due to banks
Other liabilities
Accrued taxes
Other current accruals
Other deferred income
Deferred income tax
15,466
128
24,869
6,465
49
3,360
390
32
6,642
478
4,858
943
18
3,799
13
27
Total current liabilities
50,759
16,778
Non-current liabilities due to banks
7,963
0
TOTAL LIABILITIES
58,722
16,778
(17)
40
Shareholders’ equity
Common stock (20,000 no par shares)
Payments for capital increase**
Additional paid-in capital**
Deferred compensation
Accumulated deficit
Currency translation differences
51
949
19,198
(1,067)
(27,662)
262
51
0
0
0
(2,186)
0
Total shareholders’ equity
(8,269)
(2,135)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
50,436
14,683
Minority interests
BrainLAB (C)
6
Exhibit 2: Financial Highlights for Six Months Ending March 2001
Income Statement (Euros 000)
Sales
Cost of sales
March 30, 2001
36,377
(11,565)
Gross profit
24,722
Net loss before tax
(5,859)
Net loss after tax
(6,624)
Balance Sheet (Euros 000)
March 30, 2001
Current assets
Cash and cash equivalents
Accounts receivable (trade)
Inventories
Other current assets
Total current assets
2,626
25,541
8,480
1,894
38,541
Non-current assets
8,967
Intangible and financial assets
7,950
TOTAL ASSETS
55,458
Current liabilities
Accounts payable, trade
Notes due to banks
Other current liabilities
3,872
26,668
20,018
Non-current liabilities due to banks
15,537
TOTAL LIABILITIES
66,095
SHAREHOLDERS’ EQUITY
(10, 549)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
BrainLAB (C)
7
55,458

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